Nathan’s Famous, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the 13 weeks ended June 27, 2021, the first quarter of fiscal 2022, and compares results with the 13 weeks ended June 28, 2020. Nathan’s generates revenue through its Branded Product Program, product licensing, and restaurant operations. The company reported that pandemic-related restrictions eased during the quarter; results therefore compare against a prior-year period substantially affected by COVID-19.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Total revenue | $31.319 million | $17.686 million |
| Income from operations | $10.702 million | $8.094 million |
| Net income | $5.763 million | $4.000 million |
| Diluted EPS | $1.40 | $0.97 |
| Operating cash flow | $0.077 million | $3.002 million |
| Capital expenditures | $0.175 million | $0.237 million |
- Revenue rose 77%. Sales increased 189% to $19.325 million, including Branded Product Program sales of $15.996 million, up 237%, and company-owned restaurant sales of $3.329 million, up 72%. License royalties grew 1.5% to $10.682 million; franchise fees and royalties increased to $0.907 million from $0.191 million.
- Gross profit was $3.960 million, or 20.5% of sales, versus $1.386 million, or 20.7%. Cost of sales increased 190%, broadly tracking the significant sales-volume recovery.
- EBITDA, a non-GAAP measure, was $11.032 million versus $8.521 million; adjusted EBITDA was $11.061 million versus $8.550 million.
- Operating cash flow fell despite higher earnings, principally reflecting a $7.532 million increase in receivables. Cash declined $1.538 million during the quarter to $79.526 million after dividends and capital spending.
- At June 27, 2021, current assets were $100.255 million and current liabilities $15.261 million; reported working capital was $84.994 million. Total liabilities were $172.146 million and stockholders’ deficit was $58.126 million.
- Principal debt was $150 million of 6.625% senior secured notes due November 2025; carrying value, net of issuance costs, was $147.004 million. There are no scheduled principal amortization payments before maturity. Interest expense was $2.650 million for the quarter.
Material changes and management commentary
- Management attributed much of the year-over-year rebound to reopening of Branded Product Program customers and franchised locations. About 80% of the franchise system was open in the current period, compared with 52% in the prior-year period. The system had 219 franchised outlets and four company-owned units.
- Branded Product Program volume increased approximately 232%, while average selling prices declined about 4.5%. License royalties were comparatively stable; higher retail volume was partly offset by lower average net selling prices.
- Restaurant operations reported an operating loss of $2,000, compared with a $0.893 million loss. Company-owned restaurant food costs were 64.1% of sales versus 69.5%, with management citing lower labor costs as a factor; labor availability remained challenging.
- Management cited higher corporate payroll, incentive compensation, insurance, and professional fees as contributing to a 22% increase in general and administrative expenses.
- The company declared a $0.35-per-share quarterly dividend, paid June 25, 2021, and declared a further $0.35 dividend after quarter-end, payable September 3, 2021. The debt indenture restricts certain dividends and other payments.
- Management stated that cash, cash equivalents, and expected operating cash generation should be sufficient to fund operations, debt service, dividends, and repurchases for at least the next 12 months. No formal earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- COVID-19’s duration and effects remained uncertain, including possible impacts on restaurant traffic, staffing, customer reopening, and sales channels. Management performed interim impairment tests because of pandemic-related uncertainty; no goodwill, intangible-asset, or long-lived-asset impairment was recorded.
- Beef and other food, distribution, utility, insurance, and labor costs are volatile. The company had no open hot-dog purchase commitments during the quarter and warned that higher beef costs may pressure margins if they cannot be passed through. A 10% change in food and paper costs would have changed quarterly cost of sales by approximately $1.385 million.
- New York’s minimum wage for the remainder of the state rose to $15 per hour on July 1, 2021. Management also cited scheduling rules and other labor regulations as potential cost pressures.
- Licensing revenue and overall profitability are substantially dependent on the company’s agreement with principal supplier and licensee John Morrell & Co. The filing also identifies risks relating to receivable collection and franchisee viability.
- The company recorded a $0.113 million liability under a Brooklyn franchisee lease guaranty; additional potential costs were not reasonably determinable. Management said routine litigation was not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- The company was in compliance with the 2025 Notes’ covenants at quarter-end. The notes impose restrictions on additional debt, dividends, repurchases, and other transactions. No scheduled principal payments are due before 2025.
Important facts for investors to verify
- Whether the post-reopening sales recovery persists, especially in Branded Product Program and restaurant channels, and how results compare once pandemic-related base effects diminish.
- Receivables and operating cash conversion, given the quarter’s large receivables increase and low operating cash flow relative to net income.
- Beef-cost trends, pricing pass-through, labor availability, and the effects of New York wage increases on margins and franchisees.
- Dependence on John Morrell & Co., the 2025 Notes’ debt-service burden and covenant limits, and the company’s ability to sustain dividends and any repurchases.
- The continuing effects of COVID-19 and whether future impairment charges, contingencies, or other material changes arise.